The Bank Of Scotland has been fined £45.5 million for failing to report suspicions about a £245 million fraud scandal which saw six people jailed.
The fine is one of the biggest ever handed out by the Financial Conduct Association (FCA) which said the bank had ‘risked substantial prejudice to the interests of justice’ by failing to reveal what it knew about what was happening at the HBOS branch at Reading between 2003 and 2007.
It also said there had been ‘insufficient challenge, scrutiny or inquiry across the organisation and from top to bottom’.
The massive fraud saw both the bank and a series of small businesses drained of around £245 million in unwarranted loans and is said to have left hundreds of people in severe financial difficulty.
It is believed that HBOS top management first learned of the scam in 2007, but did not inform the FCA of its suspicions until July 2009 after it had been taken over by Lloyds Banking Group (LBG).
No report was ever made to law enforcement agencies.
Impaired assets team
The impaired assets team at the bank was supposed to help small businesses in financial difficulties to resolve their problems, but instead manager Lynden Scourfield referred the firms to ‘turnaround’ consultants David Mills and Michael Bancroft who loaded them with unmanageable debts and fees.
Evidence was given in a court case at Southwark Crown Court in January 2017 that Mr Scourfield personally made £700,000 in referral fees while the consultants received £28 million in cash through various accounts, but the scam involved them arranging £245 million of unnecessary loans.
Prosecutor Brian O’Neill QC told the court: “What Scourfield gave Mills in addition to fees was the opportunity to take control of the various businesses and, in some cases, to acquire ownership of them. Mills and his associates used the bank’s customers and the banks’ money dishonestly to enrich themselves.”
He added that Mills and Bancroft would push the companies to borrow far more money than they needed – money that the pair would then syphon off.
Mark Steward, FCA director of enforcement and market oversight, said: “Bank of Scotland failed to alert the regulator and the police about suspicions of fraud at its Reading branch when those suspicions first became apparent.
Bank Of Scotland’s failures caused delays to the investigations by both the FCA and Thames Valley police.
“There is no evidence anyone properly addressed their mind to this matter or its consequences.
The result risked substantial prejudice to the interests of justice, delaying scrutiny of the fraud by regulators, the start of criminal proceedings as well as the payment of compensation to customers.”
Since the offences took place HBOS has become part of Lloyds Banking Group (LBG) and chief executive António Horta-Osório has apologised for the ‘dark period in HBOS’s history’.
He added: “I want to apologise once again for the very deep distress caused to the customers affected by the HBOS Reading fraud.
The perpetrators of the fraud rightly went to jail for the crimes they committed. The group’s management team has been committed to putting things right.”
He said LBG has offered compensation to the victims of the fraud, with 98% of the offers accepted so far. The bank has also appointed a former high court judge, Sir Ross Cranston, to run an independent review of the compensation scheme.